U.S. Expands China-Related Export Controls Regarding Advanced Computing and Semiconductor Manufacturing

On October 7, 2022, the U.S. Commerce Department’s Bureau of Industry Security (“BIS”) released new export control regulations (the “New Regulations”) that intensify and complicate U.S. and non-U.S. companies’ international trade control challenges with respect to China.  The New Regulations, among other things, impose restrictions on advanced computing integrated circuits (“ICs”), computer commodities that contain such ICs and certain semiconductor manufacturing items, and expand controls on transactions involving items for supercomputer and semiconductor manufacturing end uses. 

With respect to China, the U.S. government is adopting and expanding a variety of what would have been, until recently, novel international trade restrictions and initiating a new chapter in export controls.  As a general matter, companies in the microelectronics sector will need to adjust business planning to account for the U.S. government’s new goal of freezing China’s IC production capability rather than merely keeping China two generations behind in technology development.

Adapting to the New Regulations

The New Regulations move U.S. export controls considerably beyond the paradigm of determining whether a license is needed for an export based on the classification of the item to be exported and the country of destination.  It will be important for companies to assess their China-related compliance risk and update their compliance arrangements in reaction to, among other things, the following:

• Expanded restrictions on activity by “U.S. persons” – much like economic sanctions restrictions administered by the U.S. Treasury Department’s Office of Foreign Assets Control.[1]

• New broad restrictions on “support” by U.S. persons for certain activities of specified categories of Chinese parties, or related to the provision of specified items to China used to produce advanced semiconductors, go beyond traditional export controls.

• At the same time, the New Regulations expressly restrict supply to those parties of items that are not “subject to the Export Administration Regulations” (the “EAR”).  By and large, whether items are subject to the EAR has traditionally established the limit on U.S. export controls’ extraterritorial application to transactions outside of the United States.

• Broader and more complex license requirements based on a transferred item’s end use or end user.

• New license requirements are tied to facts about end users that are especially elusive, such as precise chip-making capabilities of Chinese fabricators.

• In addition, some license requirements are now tied not to whether there is reason to know of facts relating to the end use or end user but, rather, to whether the transferring company knows that a prospective end user does not implicate specified criteria.  In effect, a license can be required based on whether the end user implicates those criteria regardless of the state of the transferring company’s knowledge.

• Leveraging of EAR “General Prohibition 10” to restrict U.S. and non-U.S. companies’ transactions abroad.

• General Prohibition 10 forbids one to take certain actions with respect to an item that is subject to the EAR with “knowledge” (reason to know) that the item has been or will be the subject of an EAR violation absent BIS authorization.

• The New Regulations impose restrictions on transfers of technology out of China.  BIS is relying on General Prohibition 10 to limit transactions leading to, or following from, unauthorized transfers. 

• Broader and more complex restrictions on transfers outside the United States of items that are made abroad.

• Building on Huawei and Russia-related rules, BIS has created new iterations of the “Foreign Direct Product” rule that apply in a specified series of circumstances.

• Apart from capturing ever more transactions on an aggressively extraterritorial basis, the extraordinary complexity of these rules will make compliance challenges far more difficult.  Whether an item is “subject to the EAR” will more often depend on: (i) the classification of and other facts about an item to be transferred, (ii) the planned destination of a transfer, and (iii) the identity of and facts about the anticipated end user.

Key Provisions of New Regulations

a. Addition of Advanced Computing ICs, Certain Related Items and Certain Semiconductor Manufacturing Equipment to the Commerce Control List

Effective October 7, 2022, the New Regulations require a license for supply to China of certain semiconductor manufacturing deposition equipment and certain associated software and technology.

In addition, effective October 21, 2022, supply to China of the following items will require a license:

• certain ICs (including GPUs, tensor processing units, neural processors, in-memory processors, vision processors, text processors, co-processors/accelerators, adaptive processors, FPLDs, and ASICs) that have or are programmable to have an aggregate bidirectional transfer rate over all inputs and outputs of 600 Gbyte/s or more to or from integrated circuits other than volatile memories; 
• electronic assemblies and components containing the ICs described above; and
• certain associated technology and software.

b. New Export Controls Due to Semiconductor Manufacturing or Supercomputer End Uses or End Users

Effective October 7, 2022, the New Regulations also require a license for supply of items that are subject to the EAR when a party has knowledge they are destined to be used in the development or production of ICs at a semiconductor fabrication facility in China that produces:

• logic ICs using a non-planar transistor architecture or with a production technology node of 16/14 nanometers of less;
• NOT-AND (NAND) memory ICs with 128 layers or more; or
• DRAM ICs using a production technology node of 18 nanometer half-pitch or less.  

In some circumstances, the license requirements apply where a party does not know whether such semiconductor fabrication facility fabricates ICs that meet the criteria described above.  Thus, the New Regulations shift the burden of proof, and if a person does not know whether the facility falls within scope, the person must apply for a license.

Moreover, as of October 7, 2022, the New Regulations require a license for supply of any item that is subject to the EAR if the item will be used in the development or production in China of certain semiconductor manufacturing equipment. 

Effective October 21, 2022, the New Regulations will also require a license for the supply of certain items, including certain ICs, that are subject to the EAR if a party has knowledge (reason to know) that they are destined for use in either:

• the development, production, use, operation, installation, maintenance, repair, overhaul or refurbishing of a supercomputer located in China; or
• the incorporation into, or development or production, of any component or equipment that will be used in a supercomputer located in China.

c. Licensing Requirements for Exports From China

Effective October 21, 2022, export from China of technology for the design, development, or production of certain advanced computing ICs will require a license, where such technology:

• has been developed by an entity headquartered in China,
• is the direct product of certain software subject to the EAR, and
• is for the production of certain advanced computing ICs and computers or assemblies containing them.

BIS warns that parties outside of China that receive technology from Chinese entities that could be covered by this provision should confirm that the Chinese entities received a BIS authorization.  Absent BIS authorization, General Prohibition 10 could prohibit those third-country entities to take any further action with respect to such technology.

d. Restrictions on Certain Activities of U.S. Persons

Effective October 12, 2022, the New Regulations require U.S. persons to obtain a license prior to engaging in certain activities that could “support” specified weapons of mass destruction end-uses.  The designated activities include, but are not limited to:

• the provision to China of foreign-produced items that are not subject to the EAR, or servicing of such items, that will be used in the development or production of ICs at certain advanced semiconductor fabrication facilities in China (as above, the license requirement can apply if a person does not know whether the facility meets the rule’s specifications), and

• the provision to China of foreign-produced items that are not subject to the EAR that meet the parameters of certain control list entries, regardless of end use or end user, or the servicing of such items.

e. New Foreign Direct Product Rules

Effective October 21, 2022, two new Foreign Direct Product rules related to advanced computing and “supercomputers” and an expansion of an existing Foreign Direct Product rule to additional Entity List designees will become part of the EAR. 

• Foreign Direct Product rules provide that a foreign-produced item can be subject to the EAR if, in certain circumstances, it is the “direct product” of specified U.S.-origin technology or software or is the product of a complete plant or “major component” of a plant that itself is a “direct product” of specified U.S.-origin technology or software.
• The new advanced computing Foreign Direct Product rule includes both the type of “product scope” described above and a “destination scope.”
• The new supercomputer end-use Foreign Direct Product rule includes both the “product scope” and an “end-use and country scope.”

f. Unverified List

BIS also added 31 entities, including Yangtze Memory Technologies Co., Ltd., to the EAR Unverified List (“UVL”).  Suppliers must obtain a written statement from a UVL entity that is a party to the transaction prior to supplying any item subject to EAR that is not subject to a licensing requirement.

g. Temporary General License

To mitigate the New Regulations’ impact on supply chains, BIS issued a temporary general license, effective October 21, 2022 through April 7, 2023. The general license authorizes supply to China by companies not headquartered in certain countries subject to national security or arms control restrictions (such as China, Lebanon, Russia, Venezuela and Vietnam) to continue or to engage in integration, assembly (mounting), inspection, testing, quality assurance, and distributions of items covered by some of the new control list entries (such as certain high-performance ICs, electronic assemblies and components containing such ICs, and associated software and technology) if the items are destined for use outside of China. 

[1] “U.S. persons” include any U.S. citizen, permanent resident alien, entity organized under U.S. law or person in the United States.